When China is a value trap and Japan a growth play

Shuli Ren, Bloomberg

Two recent articles from Barron’s, my old home before Bloomberg Opinion, struck me for their observations on the two biggest economies in Asia. One noted that Toyota Motor Corp. was looking like a growth stock, even as the Japanese automaker stayed with its traditional business and hardly sold any electric vehicles. Toyota has risen 32% this year. The second piece, a feature published days later, was titled “China Used to Be the World’s Best Growth Story. Now It’s a Value Play.”

Barron’s summarized the market sentiments well. Bruised by China’s big tech crackdown and property bust, global investors have been seeking a new home that’s big and liquid enough to park their money. Naturally, they are looking east to Japan, which seems to be finally stepping out of a deflation stretching back to the 1990s. The Nikkei 225 Index is poised to return to its peak, set in December 1989.

Asset managers are forming favorable views towards Japan, while exhibiting “acute apathy on China,” according to Bank of America Merrill Lynch’s latest survey. About two-thirds expected a stronger Japanese economy, with a longer horizon for ending the nation’s negative interest rate policy, and a measured 3.8% wage growth.

In other words, they were envisioning the perfect macro backdrop for equities — an economy that is growing but not so fast that the Bank of Japan has to tighten. As such, almost 30% surveyed saw double-digit returns over the next 12 months. Meanwhile, alarm bells were ringing on China, with a whopping 75% saying households there would save rather than spend or invest.

But I wonder how much of this enthusiasm for the Nikkei is rooted in the fundamentals, and how much is mere justification for momentum-chasing trades.

There certainly are red herrings. For instance, we found out recently that Japan slipped into a recession at the end of 2023, countering the economic growth argument. Meanwhile, a resurgence in travel over the Lunar New Year holiday brings into question fund managers’ thesis that the Chinese are simply not willing to spend.

Or consider foreigners’ love for Japanese banks. Is that stance sound? Investors need to do some soul-searching after Aozora Bank Ltd.’s US commercial property woes sank its shares. Japan’s decade-long quantitative easing has pushed its financial institutions overseas to chase after yields and margins. Regional lenders, for instance, have become a go-to buyer in the US collateralized loan obligations market. Have foreigners done proper stress tests on Japanese banks?

It’s understandable that investors are giving the Nikkei a fresh look. Money has to be deployed somewhere, and China burned them badly in recent years. However, they would do well to remember that Japan also has a long track record of disappointments — just not in the dramatic fashion that China displays. In 2013, foreigners poured in about $155 billion, wholeheartedly embracing Abenomics. Their euphoria was gradually deflated by painfully slow wait for the BOJ to hit its perpetually unattainable 2% inflation target.

I am not being a naysayer: Japan might finally be at the end of the tunnel. But investors should revisit history and tread cautiously. China is a value trap, but that doesn’t make Japan a growth story.

Courtesy Bloomberg/Shuli Ren